More Good Bad News

Disheartening to the markets was the news that housing starts and permits were down last month. Just when we needed the housing market to take another step forward. Understandably, new homes are finding it hard to compete with all the great prices of existing listings out there. How could this be good news? When new home construction slows it certainly hurts overall economic growth. However, construction of fewer new homes makes room to get rid of excess inventory caused by foreclosures. In other words, fewer new homes built represents good news as long as existing home sales continue to increase in strength. The trend is up for existing home sales which have unevenly increased in six out of the last nine months -- even though they have decreased from the levels of oneyear ago due to the expiration of the housing tax credit. And we certainly expect housing starts to continue to strengthen because of the need for multifamily housing in an era in which the ranks of renters are increasing significantly.

The lower levels of new construction translate into fewer new homes out there to compete for resales and it bodes well for the long-term. The slower economic growth has also been translating into lower gas prices and interest rates. These are favorable factors for stronger economic recovery down the road. And as household formulation picks up, there will be a greater need for housing in the not so distant future. This higher level of household formulation coupled with natural population growth will spur the growth of new home starts and contribute to a very robust economy in the long run. The latent demand will be tremendous. Don't expect this cycle to hit tomorrow--but it will be coming. Our growing population will need places to live. Even as the economic recovery slows this season, there are positive signs for the future.

The lower amounts of new homes is good for the market, but not obviously for the builders. Inventory levels have to come down to have a better balanced market. The key problem is jobs and the economy which so strongly affects the housing market. Someone without a job is not going to buy an existing home, a foreclosed home, or a new construction home. Zero money for income, no home purchase, no REALTOR commission. That is as simple of explaining it as it can get. Interest rates could be 0% too and it wouldn't matter. The trend now is toward rentals based on the struggling economy and all those who lost their homes with foreclosures and short sales. They have to live somewhere.

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